Good Faith Violation

Roll in here for this true life story! No Cap!!

I remember a concerned customer called because he needed clarity on the “good faith violation” phrase on his dashboard. The word “violation” seemed to scare him as he swore he had never committed any crime a day in his life and he wanted nothing but to take this violation off his record asap. Who can totally relate to that feeling?

               Well lucky for him, a good faith violation is not a crime punishable by jail time [who would have thought? LOL], however, it is important to understand what it is and how it could affect one’s trading activities on the Trove platform.

What is a GFV?

Good Faith Violation (GFV) simply means an investor buys a stock and sells it before the settlement date. Good faith violation occurs when you sell a security that was originally bought with unsettled funds.  Fund settlement signifies the official transfer of securities to the buyer’s account and cash to the seller’s account. For most stock trades, settlement occurs two business days after the day the order is executed. For example: when you sell stock on Friday, your funds will typically settle on Tuesday.  

A Settlement Date is the time frame within which a trade settles i.e the time between the day a transaction is made and the day the transaction is completed. The settlement date on trove is T+2 working days i.e. the transaction day plus two days. So if a transaction is carried out on Tuesday, this means it would settle on Thursday.

Kindly note that the presence of the funds in your wallet does not signify its settlement, until after two trading days. When you make a sale, the funds are made available by the broker which essentially means that the broker is borrowing you the money because they know the funds from your sale will arrive in two trading days.  

Note that you can buy shares using that unsettled money straight away without any problems. However, if you sell those newly bought shares within two US trading days (before the money you used to buy them settles), it’s considered a Good Faith Violation. This is because you’re selling shares (and maybe making a profit) from money, you don’t yet ‘have’.

AKA if you bought a stock on Tuesday and certainly want to avoid a GFV, you have to sell it on Friday or later.

Why Should You Care?

Yea, what are the implications of a good faith violation, you might ask?

Note that you have to accrue three GFVs to get ‘penalized’. However, when you accumulate three good faith violations, it by no means implies you would be unable to trade, it just means you won’t have your funds settle in your wallet almost immediately anymore. Instead, it would settle in T+2 days.

Prior to having three GFV, Your Trove wallet is funded immediately when you sell a stock because we believe you may want to purchase another stock. However, this privilege is revoked once you accumulate three good faith violations. In simpler terms, if you sell the stock you just purchased within the timeframe that your funds have yet to settle, you have violated the good faith Trove has in you.

Warning! Would I Incur a Good Faith Violation If I Make This Trade?

We’ve heard customers would say they might be unable to calculate the days in between trades to know not to get a good faith violation. We are one step ahead of you! Before you carry out a transaction that may result in a good faith violation, a warning message pops up! We got your back!

How Long Do I Carry This Violation Penalty For?

If you already have three good faith violations within a 12-month period, it would take 90 days for the restrictions to be cleared off. You will essentially be restricted to purchasing securities with settled cash only for a period of 90 days. Although not permanent, it is slightly restrictive and would be better to avoid getting those three strikes.

Once I had explained everything to the customer, he said “I would never violate the good faith you have in me” Lol

Two Examples Before We Hit The Road:

Good Faith Violation Example: 

Cash available in USD Wallet = $0.00 

On Wednesday morning, a customer sells Stock Y for $5,000 in cash account proceeds. 

On Monday afternoon, the customer buys Stock X for $5,000. 

If Stock X is sold prior to Tuesday (fund settlement date of the Y sale), a good faith violation would be charged as the Stock X is not considered fully paid for prior to sale. 

The best way to avoid good faith violations is to ensure that you are only buying stocks with fully settled funds. Alternatively, avoid selling a stock within two days of buying it, and make sure you have enough funds in the account to fund the initial purchase.

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